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D. Cost Analysis Technologies. Where a formal cost analysis is required, PHAs should follow the instructions in this section. As indicated, the number of instances where a PHA will be required to conduct a formal cost analysis will be limited.

1.   Commercial Yardsticks. Where available, a PHA may use commercial yardsticks in lieu of a formal cost analysis. Since the overall purpose of a cost analysis is to settle on total prices that are fair and reasonable, these yardsticks provide a measure of that overall price reasonableness. The following examples illustrate this point.

a.   A PHA is negotiating A/E fees with the architect for additional work pursuant to the changes clause in the contract. The PHA would not need to request that the A/E firm break out its hourly fees in terms of profit, overhead, etc., provided that the overall hourly fee was reasonable; vis-à-vis fees normally charged in that community.

b.   A PHA has a 6-unit scattered site project that is adjacent to its HOPE VI development. The HOPE VI development is operated by a private management company. The PHA determines that it is in the best interest of the PHA that the HOPE VI development and the scattered site project be managed jointly and is negotiating a sole source procurement with the HOPE VI management company. The PHA would not need to request that the management company break out its proposed management fee in terms of profit, overhead, etc., provided that the overall management fee was reasonable vis-à-vis fees normally charged in that community.

c.   The PHA has a security guard contract for its high-rise properties. The rates charged are $14/hour for non-armed guards. Because of a recent rise in security incidents, the agency is negotiating a change order to increase the coverage under the contract. The PHA would not need to request that the security company break out its proposed cost fee in terms of profit, overhead, etc., provided that the overall hourly rate was reasonable vis-à-vis rates normally charged in that community.

2.   Level of Detail and Analysis. The level of detail and complexity of the cost analysis should be commensurate with the dollar value and complexity of the contract. For example, in a construction change order proposal for $30,000, where the PHA’s changes to the specifications only result in added labor hours for three skill categories, and the wage rates are at the Davis-Bacon wages, the PHA’s cost analysis may be limited to determining the reasonableness of the number of hours proposed. If, however, the change order proposal was for $250,000 and included added material, new subcontracts, and other items, the PHA should evaluate whether the costs proposed are allowable, allocable, and reasonable, using the more detailed techniques described below.

3.   Conducting a Cost Analysis. When conducting a cost analysis, PHAs should generally proceed in accordance with the following (see also Appendix 12 for a guideline).

a.   Verify the cost and pricing information submitted and evaluate the following:

i.   The necessity for, and reasonableness of, proposed costs, including allowances for contingencies. Proposed costs must meet three critical tests. The costs must be:

•   Allowable. The applicable cost principles (see discussion below) will usually state whether a type of cost is allowable or not.

•   Allocable. This means that the costs are logically related to or required in the performance of the contract. Many costs may be allowable but not related to the work required under the contract.

•   Reasonable. This term is generally defined as what a prudent business would pay in a competitive marketplace. A cost can be allowable, allocable and still not be what a prudent businessperson would pay.

ii. The projection of the contractor’s cost trends. Are his/her costs likely to increase or decrease?

iii. The assessment of proposed direct cost elements by a technical expert, e.g., engineer, architect, etc., to determine their necessity to perform the contract and reasonableness, e.g., in comparison to market rates.

iv. The application of audited or pre-negotiated, e.g., by the Federal Government, indirect cost, e.g., overhead rates, labor and fringe benefit rates, or other factors.

v. The effect of the contractor’s current practices on future costs. Does the contractor have a track record of containing costs (completing contracts at or “under cost”)?  Does he/she overrun costs?

b.         Compare costs proposed by the offeror with:

i.   Actual costs previously incurred by the same offeror. If it is a repetitive type of work or service, how much has it cost in the past?  Apply any appropriate inflation factors for past work.

ii.  Costs proposed by other offerors. This comparison may point out the need for negotiations if prices of the different offerors vary widely or seem unusually high (or low) compared to the ICE.

iii.  Previous cost estimates from the offeror or other offerors for the same or similar items.

iv.  The methods proposed by the offeror with the requirements of the solicitation (i.e., do the costs reflect the technical approach proposed and the work required, and are they cost efficient?).

v.  The PHA’s ICE.

c.   Verify that the offeror’s cost submissions comply with the appropriate set of cost principles.

i.  When performing a cost analysis, PHAs shall use the applicable set of cost principles, which have been issued by the Federal Government, to determine the allowability of proposed costs. (Note that cost principles are not used when performing a price analysis.)  These cost principles set the standards for the allowability of a wide range of costs (e.g., salaries, travel, advertising, etc.). Each set applies to contracts with a specific group or type of organizations, so one set will not work for all contracts.

ii.  The cost principles and the type of contractor entity to which they apply are as follows:

•   OMB Circular A-87, for contracts with State, local or Indian tribal governments.

•   OMB Circular A-122 for contracts with most non-profit organizations.

•   OMB Circular A-21 for educational institutions.

•   FAR 48 CFR Chapter 1, Subpart 31.2 for profit-making entities (e.g., commercial business concerns) and certain nonprofit organizations listed in Attachment C of OMB Circular A-122.

E. Documentation.  With respect to price reasonableness, the procurement file should be documented to support the actions taken. In the case of sealed bids where there was adequate competition, no additional documentation is required in that the bid tabulation sheet, or equivalent, will serve as the test of price reasonableness. Similarly, in the case of competitive proposals where (1) there was adequate competition, (2) the scope of work was not complex (easy to evaluate competing bids), and (3) the PHA did not ask the vendor to break out elements of costs separately, no additional documentation is required for price reasonableness other than the comparison of prices offered. However, documentation is required to demonstrate price reasonableness, including any cost analyses, whenever (1) adequate competition did not exist, (2) adequate competition existed but the PHA received only one bid/proposal, or (3) the price obtained varied significantly from the ICE, in which case the Contracting Officer should notate/explain the reasons for the difference, e.g., poor estimate, etc.